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Chancellor Angela Merkel and other EU leaders attempted to solve Europe's debt crisis on Monday evening with a German-driven treaty meant to end deficits.

But the announcement that 25 of 27 European Union nations had adopted the new pact on budgetary discipline was overshadowed by outrage over a German suggestion that heavily indebted Greece submit its finances to EU review.

The idea of placing the cradle of European democracy under the supervision of an EU budget tsar quickly failed to gain traction at the summit in Brussels.

"There cannot be any talk of putting any nation under wardenship. It would not be reasonable, democratic and efficient," French President Nicolas Sarkozy told a news conference.

Sarkozy said that German Chancellor Angela Merkel did not back the idea, suggesting the proposal came from others in her government.

Merkel, however, did not repudiate the controversial proposal which Greece's education minister termed "the product of a sick imagination."

"I think that in light of the discussions, which are often very emotional, it is important that we come to a conclusion" about the extent of the surveillance of Greece, she told reporters.

Greece is already essentially under supervision with European Commission, European Central Bank and International Monetary Fund auditors in Athens to ensure the government implements reforms in return for bailout loans.

Athens has been under constant pressure to implement drastic budget cuts and radical economic reforms in return for installments from a €110-billion bailout it was granted in May 2010.

Merkel noted that a second €130-billion rescue package for Greece, which European leaders hope to finalise this week, was conditioned on some form of "surveillance that we are now thinking about how to make more efficient."

Under the radical German proposal, a commissioner appointed by the 16 other eurozone finance ministers could veto budget decisions made by Athens.

"I am strongly against the idea of imposing a commissioner with that mission only to Greece. That's not acceptable," said Luxembourg Prime Minister Jean-Claude Juncker, chairman of the key group of eurozone finance ministers.

Calling the German proposal "vexing," Austrian Chancellor Werner Faymann said it "doesn't achieve anything and it goes in the wrong direction."

However, the plan drew cautious support from Swedish Prime Minister Fredrik Reinfeldt, who complained that Greek authorities "are not delivering on reforms." Dutch Prime Minister Mark Rutte echoed those sentiments: "Greece must also honour the commitments it has made with us."

Merkel did not push this plan further. However, she said it was about "how Europe can help Greece accomplish the tasks given to it."

The EU focus on bailouts was supposed to give way at Monday's summit to a renewed push to stimulate growth and create jobs across European economies.

This idea even saw tentative moves to place an ambitious free-trade deal with the United States on the coming agenda. But at its root was the announcement that 25 of 27 countries had adopted the new pact on budgetary discipline.

The Czech Republic joined Britain on the outside looking in, but a threat by Poland to withdraw evaporated after France gave ground in an argument about the influence of non-euro countries on eurozone summits.

Pushed by Germany and the ECB, the treaty – to be formally signed in March – will require governments to introduce laws on balanced budgets and impose near automatic sanctions on countries that violate deficit rules.

Only those countries that sign up will be able to access bailout aid from a new rescue fund whose legal basis was also ticked off at the talks. It will enter force after 12 nations ratify it.

The pact is a "first step toward a fiscal union," said European Central Bank chief Mario Draghi amid hopes among some governments that the pact will prompt the ECB to step up a controversial bond purchase programme.

With Italy and Spain still fragile, EU leaders will discuss in March whether to add half as much again to the new rescue fund's initial €500-billion size, amid wider moves to beef up IMF resources.

"We are getting the feeling that there is a shift in Germany's position and I am optimistic," said Italian premier Mario Monti.

European Commission chief Jose Manuel Barroso said €82 billion of unspent EU funds could kick-start growth and job creation – but with the catch that money is matched locally.

Among ideas adopted by the summit for boosting growth in Europe, there were calls to lower the tax burden on employers to get more people hired, and give all young people guaranteed options in work, training or study.

However, a summit statement concluded: "There are no quick fixes. Our action must be determined, persistent and broad-based."

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